Starbucks Organizational Structure and Management Functions

General Description

Starbucks is a company operating in the quick service restaurant business, where it ranks as the third-largest firm in the industry in the U.S. by revenue (Oches, 2014). The company is publicly traded on the NASDAQ under the ticker symbol SBUX, with a 97.33% float and 2.74% insider ownership (MSN Moneycentral, 2014).

With 191,000 employees, Starbucks was formed in 1985 in its current organization, though it traces its roots to the early 1970s. The company was reorganized after Howard Schultz adopted the name and applied it to his coffee chain vision. Today, Starbucks operates in 65 countries around the world (MSN Moneycentral, 2014). The company operates both company-owned and franchised stores, with distribution varying by region. Overall, there are 19,767 stores: 10,194 (52%) are company-owned, and the remainder are franchise stores. In the Americas, 60% of stores are company-owned. In Europe and the Middle East, 57% of stores are franchised. In Asia-Pacific, 77% of stores are franchised. Starbucks also operates other segments, including juice and tea brands, most of which are company-owned (Starbucks 2013 Annual Report).

Teavana, a brand acquired in 2012, represents the company's strategy to apply its core competencies in coffee to establish teahouses (Choi & Skidmore, 2012). The company has also acquired a juice business to diversify within the beverage sector (Jargon, 2011).

The major growth markets for Starbucks are China, which received 206 new stores in 2013, and the U.S., which received 193 new stores. Canada, Mexico, and South Korea are also significant growth markets. The revenue split is 74% beverages, 20% food, 3% packaged coffees, and 3% merchandise and equipment (2013 Starbucks Annual Report). Beyond retail operations, Starbucks generates revenue through the K-cup single-serve coffee system and a licensing agreement with Pepsi for Starbucks-branded beverages. These businesses generated approximately $1.42 billion in revenue and $415 million in net income in 2013. The company overall earned revenue of $16.447 billion in fiscal year 2014 with net income of $2.068 billion, representing significant improvement from 2013, when the company absorbed a $2.7 billion charge related to terminating a distribution deal with Kraft to gain control over its packaged products (Schultz, 2013).

Starbucks' customer base is generally middle class and consistent across geographies. The company competes with a differentiated strategy, positioning its goods at a premium through branding, service quality, and unique experience. The Starbucks experience defines the company's service proposition (Michelli, 2007). The brand symbolizes affordable luxury and middle-class belonging—the ability to afford premium coffee and service within a quick service model accessible to mainstream customers. Starbucks appeals to both urban and suburban markets, with increasing rural presence. The target market is middle-income or higher, consists of repeat customers with high loyalty, and lives or works near a location; customers do not typically travel far for Starbucks. The typical customer is of working age, has or is pursuing a college education, and values consistency and reliability in the purchasing experience. The targeting strategy itself was unique when Starbucks expanded in the 1990s; many competitors now attempt to replicate the model.

Most competitors are either mom-and-pop operations emphasizing anti-chain positioning or regional chains attempting to emulate the Starbucks model. Starbucks is substantially larger than these competitors. In the coffee quick service market, the most serious competitors are McDonald's, particularly since it introduced the McCafé concept (Lim, 2014). While McDonald's is larger overall, the majority of its revenue comes from burger sales, making it much smaller in coffee. Dunkin' Donuts and Tim Hortons also compete in the quick service top 50, but operate in the donut-shop/coffeeshop model, which targets a more mainstream market than Starbucks and rarely converts Starbucks customers. This is because Starbucks' aspirational positioning creates a sense of class distinction compared to downmarket alternatives (Lim, 2014).

The key resources for Starbucks are its brand, its people, and its products. The brand is perhaps most critical. In quick service, the brand is what customers purchase—it represents a promise of consistent product and experience. When this experience is replicated across locations, it reduces customer purchase risk; customers know what to expect when entering any Starbucks. This consistency is essential for franchising, as it allows rapid geographic expansion while maintaining market perception (Michelli, 2007). The company's ability to create markets where few or none existed—in the U.S., Japan, and China—demonstrates strong management skill and market understanding. Interestingly, Starbucks has struggled in regions with established coffee cultures, maintaining few stores in Australia and none in Italy.

The company's training programs have been a key strength, though they face pressure as the organization grows. Starbucks attracts talent by offering superior benefits and working environment compared to most quick service competitors. This allows the company to recruit higher-caliber employees, train them to superior standards, and deliver service exceeding lower-end competitors. However, scaling training while maintaining quality is increasingly challenging.

Starbucks operates with a geographic organizational structure. Since other segments remain too small to warrant major structural recognition, the company's primary divisions are the Americas, Europe/Middle East/Africa, and China/Asia-Pacific. While regional strategies are developed locally, major decisions are made at headquarters to maintain centralized control over resource deployment.

The four major management functions—planning, organizing, leading, and controlling—operate at different organizational levels. This section examines each function in turn.

Management Functions and Structure

Strategic planning at Starbucks is conducted centrally at headquarters in Seattle. This reflects major decisions about market entry, acquisitions, and brand extension. The company operates most stores identically worldwide, minimizing the planning required at lower levels. When Starbucks identifies strategic priorities, communication flows from head office, indicating where decisions are made. For example, when the company designated China as a critical growth market, the CEO announced this decision, and head office reinforced it by renaming the Asia-Pacific division as the China Asia-Pacific division (Sandholm, 2014).

Centralized planning has guided international expansion and business diversification. Senior executives from existing divisions typically lead new business units. Head office involvement extends to detailed operational decisions; for instance, it determined the type of cheese Starbucks would use in breakfast offerings. Regional planning primarily occurs on the operations side, focusing on store location specifics. Head office may designate China as a priority and allocate substantial resources, then allow local offices to identify target cities using local market knowledge and analyzing trade-offs between penetrating major markets or developing emerging ones.

Franchise decisions remain centralized. When entering Japan, Starbucks sought franchise partners capable of driving high growth through near-total franchise ownership. This entry mode has been adopted in many countries. Later, when Starbucks decided to buy back franchises in China, this remained a strategic head office decision (Tang, 2011), further demonstrating highly centralized planning.

The organizing function operates primarily at the regional level. Once head office establishes plans and dedicates resources, local units handle most organizational execution. This includes local marketing efforts, franchisee relationships, store site selection, and supply chain management. Most decisions occur at national or sub-national (e.g., state) levels.

Store layout decisions do not operate at this level. Starbucks maintains only a handful of standard layouts, with behind-the-counter design highly consistent across locations. Layout adaptation occurs at the individual store level, managed by the local manager under an archetype created at head office, bypassing regional staff. This delegation reflects two principles: first, Starbucks' value derives substantially from replicability, requiring head office to establish design principles for all stores. Second, detailed site-specific adaptation is not suited to head office; once the regional office assesses location value, the local manager determines which store design applies to the specific site.

Starbucks' organizational structure is primarily geographic. Other businesses are grouped into two smaller units. Within this structure, subdivisions are also geographic because stores operate uniformly. The structure is hierarchical with clear divisions regarding which level handles which management tasks. Store management handles human resources, ordering, and strategy implementation. Head office and regional offices manage product mix and store locations. Corporate level establishes human resources policies and resource allocation decisions.

Starbucks centralizes employee motivation through a human resources system designed to attract and retain better talent than quick service competitors. These policies were developed centrally in the company's early days and communicated through the company website as initial communication, internal channels as part of corporate culture, to franchise partners, and to managers throughout the organization. Buy-in for motivation strategies is very high.

Because decisions are made centrally or regionally, high communication levels are necessary to ensure strategy understanding. Internal communications operate electronically, requiring managers to stay connected to internal messaging. Both head office and regional offices maintain dedicated communications departments ensuring timely dissemination. Current systems appear effective.

Company leadership centers on CEO Howard Schultz, founder of Starbucks in its modern form. The company struggled without him and has thrived under his guidance. Centralization exists because Schultz maintains a strong vision for the company, which he communicates through senior executives. Leadership thus remains highly centralized, with other leaders primarily implementing strategy or providing insight rather than offering strategic inspiration.

Little public information exists regarding Starbucks' control systems. Financial controls enable decisions about closing stores or exiting markets. The company operates an inspection system enforcing service standards, though details remain proprietary. Control is a key differentiator distinguishing Starbucks from competitors. Because customers do not observe control systems, they remain proprietary and serve no marketing function. The company intentionally avoids publicizing major control mechanisms.